Exploring The Practice of Outsourcing

Whenever efforts of lowering cost or making better user of time, labor and technology entail some form of subcontracting, functional elements of a business such as manufacturing or designing to another firm – such an arrangement is referred to as outsourcing.

It pertains to the transfer of day-to-day or management activities of business process to another, bound by a contract or agreement that is signed by both parties, and is often based on the understanding that the supplier assumes the contractual responsibility with the transfer of assets, people and other resources from the client (sourcer or customer).

Offshoring on the other hand is also a form of outsourcing but it involves a third party firm based in another country. With the rise in globalization of operational outsourcing models it is now common to encounter new terms such as nearshoring, noshoring, betshoring and rightshoring – these indicate the variety of interchanging locations and choices.

While multi-sourcing is an operating model designed to enable various sections of the client business to be sourced from multiple suppliers. Strategic outsourcing relates to the reliance by firms on intermediate marketing in the provision of specialized operational capabilities to augment existing capabilities.

Outsourcing arrangements also come with complexity of work definition, codifying requirements, pricing, legal terms and conditions compelling most clients to seek advisory services of outsourcing consultants or intermediaries with the technical capacity of scoping.

Another potential downside to outsourcing is the possibility of a client receiving poor quality service in relation to subcontracting of products and services.

This quality risk is fueled by various factors such as opportunism, information asymmetry, high asset specificity or switching of costs by supplier, the risk is further perpetuated by poor buyer-supplier communication, lack of supplier capabilities (resources/capacity) or buyer-supplier contract implementation statutes.

In some instances quality reduction occurs on the basis of deliberate attempts to implement dubious cost saving measures by the supplier, driven by the desire to attain higher profit margins. Some may utilize inexperienced staff against their initial contractual obligations to which they would have convinced the sourcer to subcontract with them.

By deliberately changing the qualified personnel handling important tasks after the operational standard compliance checks by the client have been passed. However, public opinion towards outsourcing is not always favorable as many believe that it damages local labor markets, and currently the European Union has regulations in place aimed at the protection of employment referred to as Transfer of Undertakings.